Online entrepreneur Nicole Dean teaches internet marketing tips and strategies. She also interviews other successful internet business owners to find out the secrets to their online success. Find out what they're doing that you're not.

How to Reduce Your Taxable Income for Next Year

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It’s another Expert Briefs, where I ask really smart business owners to answer your burning questions.

This week I asked our panel of experts the same thing I asked last year and the year before …

“If you made more money this year than last year, your quarterly taxes probably won’t be enough to cover what you owe (since you’ll owe more), assuming everything else in your life remains the same. (Unless you added a deduction like a baby to your family or something…)

Quick explanation (with totally hypothetical numbers):

Let’s say that you made $30,000 in 2011. Your quarterly taxes that you pay in 2012 might be then set at $2000 every 3 months. ($8000 for the year)

Now, what if you made $60,000 in 2012 – and you’re only paying $2000 every 3 months, then come April, you may have a day of reckoning. (You will have paid $8000, but then may owe as much as another $8000 for taxes on the added income.)

So, you’ll owe a chunk of money in April.

At the end of the Year, because I’ve been fortunate enough that my income has grown every year, I Normally End up Making Several Large Purchases in Order to Decrease my Taxable Income for Next Year.

Do you have ways you reduce your taxable income? If so, what kinds of things do you purchase?”

I think you’ll find the answers this week interesting and helpful in your business tax planning and preparations.

** Note: Contact YOUR CPA/Financial Adviser before making any decisions. The following people are not professionals in regard to tax laws.

Actually I AM an accountant! That was my Bachelors’ degree. My first business was a bookkeeping and tax service that I “invented” so I could write off my first computer. Happily, I sold that business for a nice profit 3 years later. But taxes remain a hobby for me.

Okay, if you’re still reading (and not laughing at that “taxes as a hobby” comment), the secret to tax savings is timing. You don’t necessarily WANT to reduce your taxes this year. If you’re new in the business, it’s likely that you’ll make more next year and need more deductions. Likewise, there’s a good chance that tax rates are going up, if the government has anything to say about it. So again, you may want to defer those expenditures until January.

But if you do want a deduction this year, here are a few easy ones –

Office supplies (stock up!)

Phones and tablets, if used more than 50% for business

Contractors and employees (pay before the end of the year – they’ll love it

and you get the deduction)

Affiliate payments (pay them at the end of December for sales to that point.

Since I live in Japan, I’m dealing with a tax system that differs quite a bit from what I dealt with in North America. However, some of the following advice (especially, to keep all your receipts) probably applies in all countries.

One benefit we enjoy in Japan is the no-limit entertainment expenses deduction. Due to our culture of entertaining prospects and customers, the Japanese tax system does not limit you on how much you can deduct for entertainment. Therefore, any time I go drinking, eating, or otherwise spending money in a fun way, I ask for an official receipt (ryoushushou). Find out what you can deduct, and make it a habit to always save your receipts.

Since my office is in my home, I also can deduct a percentage of all home expenses from my income tax. This means that I can deduct a percentage of rent, water, electricity, and grounds maintenance fees. This is a deduction I also enjoyed in Canada, so look into it for where you live. This can make a huge difference in the amount of tax you pay.

It took me a long time to realize leasing a car – at least for my business and my perspective – was actually a better deal than buying a car… I was always raised that leasing was dumb and it’s true if you can’t set it up to be a business deduction… but if you do it right with your accountant’s guidance, it might actually be worthwhile for you to consider…

Nicole Dean of .. here! .. says:

Hey guys! I posted about this topic two years ago and last year, and had my friend, who is a financial adviser help, too.

So, I’ll resurrect that blog post because it contains some really good tips.

Here it is…

If you made significantly more money with your online business this year than you did last year, CONGRATULATIONS! That’s wonderful news.

However, next year at tax time you might not think so — if you’ve got to come up with an extra $17,000 to fork over in April like I did this year.

Basically, it comes down to how much money you made (which is the overall amount that you took in minus expenses). That’s what we’re taxed on.

Last year, in December, I purchased approximately $5000 in advertising and paid my affiliates early and prepaid some subscriptions in order to lessen my income. (The expenses get subtracted from my income so my overall income would be less — therefore less taxable income.)

So, since advertising is an expense, I choose to spend money on it, knowing that it’ll pay me back (and then some) the following year.

As to how much is the right amount for you to spend… you’d have to run those numbers with your CPA/Accountant. Normally I spend a bunch in December, then we run the numbers again in January to see how much I should put into my SEP (which is like a 401K) to give me the best tax breaks in April.

WARNING!!!!Don’t go spending money you don’t have on things that you don’t NEED. You’re still spending money.

However, if you plan to buy things anyway.. or have a birthday coming in February like I do and want to treat yourself to some business items, then buying early can be a smart move – especially if you’re planning for growth for next year.

For instance, I do some consulting for high level marketers on their affiliate programs — and I’ve gotten more than my regular amount of requests this month — probably because they’re planning for next year. So, why not have them prepay and save on their taxes?

Now, I’m not a tax adviser (nor a doctor nor a lawyer), but I do know a CFP & CPA who I asked for advice. So, here she is Kristine McKinley in an interview I did with her and posted in 2008:

Kristine McKinley says…

You definitely have the right idea. If your business income is up this year, then you want to do some year-end tax planning to try to reduce your taxable income for the year.

You basically have two options: you can defer income into the next year, or accelerate expenses into this year.

If you’re not sure how to do that, here are some tips to reduce your taxable income:

Defer income:

if you are self employed, one way to reduce your taxable income is to defer income. You can do this by holding off on billing clients until after 12/31. Or if you were planning a teleclass or a big product or service launch at the end of the year, you could hold off until January.

Accelerate expenses:

– Software: I know I’ll need tax software in the next month or so, so I can choose to purchase it in 2008 if I want to accelerate my expenses, or if I think my 2009 income will be higher, I can wait until Jan 1 to buy my software

– Supplies: same concept; any supplies I know I will need for tax season I’m going to buy now to reduce my 2008 income.

– Furniture and equipment: do you need a new computer, an external hard drive for backup purposes, a new chair for your desk?

– Web hosting or domain renewals: do you have any domains that will be expiring soon? Renew them now instead of waiting until they expire.

– Office supplies, shipping supplies, computer supplies: basically stock up on any supplies that you use on a regular basis in your business before the year is over

– Continuing education or classes to improve your business: if you are required to take continuing education, or if you just want to take some classes to help you improve your business, signup and pay for the class before the end of the year so you can deduct it on your 2008 taxes.

– Membership sites: if you’ve been sitting on the fence about joining any membership programs (Shelancers for example), signup before Jan 1 so you can deduct the fees on your current year tax return. Even better, if they offer a lifetime membership fee, choose that option to save money and to take an even larger deduction on your tax return.

– Do you need any work done by web designers, VAs, or other independent contractors? Consider prepaying them for work that you expect them to do in the next 30-60 days. Don’t forget to send them a 1099 if you pay them $600 or more during the year.

– Affiliates: do you usually pay your affiliates on the 5th of the month? Consider sending them their December commissions on 12/31 instead of waiting until Jan 5th.

– Donate to charity: while donations to charity won’t reduce your business income, they will reduce your total income, so consider donating cash, services or goods to your favorite charity before the end of the year

Basically, any expenses that you expect to incur in the next few months that can be accelerated into 2008 will help reduce your taxes for 2008.

One other strategy that every self employed person should consider is funding your retirement account. However, you have a little more time for this strategy as the deadline for most retirement contributions (to IRAs, Roth IRAs, Simple IRAs, etc.) is April 15.

Here are my recommendations for some items you might purchase (based upon my favorite things)…

A bit of tax advice I can share is that even if you do not have the cash to pay your extra tax liability, do NOT simply turn your head the other way! Contact your accountant (or find one if you do not have one) and find out what your options are.

I have heard horror stories that the fees and penalties can end up being MORE than what you owe!

Get the advice you need and address it. Ignoring it is a recipe for many sleepless nights, and paranoia.

Paul.
(Note – fortunately, I have planned well enough and have an awesome tax person that I have not had to personally experience this! )

Thank you for this Nicole, I’ve been researching all of the tax information for my virtual assistant business – I’ve been in business for two years and it’s finally generated enough revenue that I’m sort of in a panic about making sure my taxes and expenses are all right. I’m going to indeed need to hire someone.

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My mission: To help busy online marketers, specifically infoproduct sellers, to build sustainable online businesses that help them reach their financial and lifestyle goals while making both the web and the world a better place. And, hopefully having a lot of fun while doing it!